As Twitter Inc. and billionaire Elon Musk gear up for a knock-down legal fight in Delaware over his attempt to cancel a $44 billion buyout of the social-media platform, some are asking why the case landed in the second-smallest US state and in the oddly named Court of Chancery.
The home state of President Joe Biden changed its business-law statutes in 1899 to attract more corporations. In the 19th century, New Jersey was the most-popular corporate home for most US companies, historians say, but Delaware has since become the undisputed leader. More than 60% of Fortune 500 companies are now incorporated in Delaware, drawn by its director-friendly laws, some tax breaks and the prowess of its courts in handling business disputes. Many merger agreements, including Musk’s $54.20-per-share offer for Twitter, specifically require any legal disputes over the deal be heard in Delaware.
2. What is the Chancery Court?
The 230-year-old Delaware Chancery Court is a court of equity rather than law — meaning it historically handles cases seeking relief other than monetary damages. Equity courts first arose in England and stemmed from petitions sent to the lord chancellor. Most such courts in both the US and UK were merged with law courts over the past two centuries, but not in Delaware. There the Chancery Court, where judges are called chancellors, has developed a strong expertise in business law cases. Chancellors, who decide cases without juries, often issue injunctions affecting deals and can also order specific performance — requiring parties to complete a deal, as Twitter wants Musk ordered to do. Though the Chancery Court doesn’t award damages per se, it can order a party to pay money in the form of restitution. It also can hear cases much more quickly than other courts.
3. What other deal disputes has the court decided?
Musk appeared in Chancery Court in July 2021 to testify in his defense against a shareholder lawsuit claiming he engineered a sweetheart deal by forcing Tesla Inc. to buy renewable-energy provider SolarCity for $3 billion. Musk, who was the largest shareholder of both companies at the time of the acquisition, spent more than a day on the witness stand, musing about turning down jobs on Wall Street to start his Tesla electric-car company and sparring repeatedly with the shareholders’ lawyers. The billionaire came away pleased nine months later, when the chancellor ruled in his favor.
4. How will the court decide Musk’s fight with Twitter?
The chancellor will dig into the legal thicket presented by the 73-page purchase agreement and decide whether the social-media platform’s alleged mishandling of the transaction justifies Musk’s decision to walk. It’s likely Musk would once again be called to the witness stand to explain his reasoning. Musk’s rationale for his departure centers on automated-user accounts known as bots and how Twitter accounts for them. He contends the social-media platform is teeming with spam bots, disputing Twitter’s contention they make up less than 5% of total users. He contends Twitter violated the buyout agreement by not properly turning over all its information about how many bots are within its customer base, creating a so-called Material Adverse Effect, or MAE, that allows him to walk away.
5. Does Musk have a good argument?
Musk issued a humorous late-night meme in response to Twitter’s preparations to sue him in Delaware and force the deal’s completion.
But even if Musk feels good about his moves, legal experts say the Chancery Court has rarely sided with parties attempting to bail on acquisition commitments. It’s difficult to prove an MAE has occurred. Musk would have to prove the alleged omissions about bots amount to an “unexpected, fundamental, permanent” negative development that effectively makes the transaction unworkable, said Larry Hamermesh, a University of Pennsylvania law professor. In a 2020 case involving Boston Scientific Corp., a Delaware judge defined an MAE as an “adverse change in the target’s business that is consequential to the company’s long-term earnings power over a reasonable period, which one would expect to be measured in years rather than months.” If Musk can’t prove his MAE, Twitter could ask the court to force him to consummate the $44 billion purchase.
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